Oil field services sector recovery leaves many companies in limbo

Schlumberger Ltd., Halliburton Co. and Baker Hughes Co. have seen their financial performance improve thanks to severe cost cuts and international exposure, but smaller oil field services companies still face bankruptcy and consolidation activity, credit ratings analysts said.

"Things are certainly better than they were in mid-2020, as we are seeing some pickup in rig activity in North America," S&P Global Ratings' Director Carin Dehne-Kiley noted in an interview. "We're up to 430 rigs after a low of 240 in the middle of 2020, but that compares to 800-plus in 2019."

International demand for oil field services is due to rise during the second half of 2021, but drillers in the U.S. and Canada are not looking to make similar investments as they maintain capital discipline, Dehne-Kiley said. That means firms like land driller Patterson-UTI Energy Inc. which depend on a volatile North American onshore market, remained particularly challenged.

"They have a lot of debt to work through," Dehne-Kiley said. "A lot of these guys — I don't know what they're going to do if the market doesn't recover."

Moody's agreed in an April 8 note to clients that Patterson-UTI and NOV Inc., which does operate internationally, have much longer paths to recovery than the biggest three oil field services providers. Schlumberger's 2021 numbers, for example, will reflect "a full year's benefit from its 2020 dividend cut, representing an additional $1 billion reduction in dividend payments in 2021," the credit rating agency said.

Schlumberger, Halliburton and Baker Hughes all saw their probability of default ratings subside during the second half of 2020, according to S&P Global Market Intelligence data, but that risk stayed high in other parts of the sector. Even firms that have not already filed for Chapter 11 bankruptcy protection or combined with a competitor might still pursue those avenues, according to Dehne-Kiley. Unit Corp., which issued a going-concern warning just months after emerging from Chapter 11 bankruptcy in September 2020.

Haynes and Boone LLP reported in January that 44 oil field services companies filed for bankruptcy during the second half of 2020. Some, like Superior Energy Services Inc. and Noble Corp., have already completed the restructuring process, with Noble also announcing plans to acquire Pacific Drilling SA for $913.8 million.

In October 2020, Rystad Energy analyst Audun Martinsen said providers of rigs, vessels and seismic services were struggling the most in the offshore market. In the onshore shale market, the pain appeared to be weighing most heavily on fracking companies and proppant providers.

On the equity side, oil field services stocks spiked early in 2021 before falling moderately in mid-March. Halliburton units saw the largest gain over the past 12 months, with an approximately 160% price jump.

"We believe this recent pullback is fairly healthy after the spicy start to the year ... rather than a cause for mucho (long-term) concern," analysts at energy investment bank Tudor Pickering Holt & Co. told clients March 18.

North American-focused oil field services companies still have limited upside, especially "those with an asset-heavy orientation (i.e., pressure pumpers, land drillers, etc.)," but Tudor Pickering Holt noted that Cactus Inc., ChampionX Corp. and Halliburton are "our favorite ways to express" that onshore bet.

Halliburton shared the positive outlook. "We are driving strategic changes in North America and building a leaner and more profitable business," President, Chairman and CEO Jeffrey Allen Miller said during the firm's January 19 fourth-quarter earnings conference call. "I am more optimistic today than I certainly was 90 days ago."